CHICAGO--If you're making an offer to buy a house, you've probably thought about the price the seller would willing to accept. But have you considered what she thinks about what you think about her feelings on a good price?

Confused yet? If you're only thinking one move ahead, you may have poor strategic IQ, says Caltech behavioral economist Colin Camerer.

Don't worry: most of us have a low strategic IQ,  only capable of a few rounds of, "she thinks that I think that she thinks..." before we give up the strategizing and move ahead with our plan, said Camerer in his topical lecture at the 2009 AAAS Annual Meeting.

The theory explains why many people went to see the Eddie Murphy movie Pluto Nash--but more about that later.

Camerer is one of a new breed of economists who use the tools of psychology--observing animal behavior, tracking eye movements and pupil dilation, using brain scans--"to model the limits on rationality, willpower, and greed," said Camerer.

Unlike more classical models of economic behavior, the models of Camerer and colleagues do not assume that people are consistent or optimal decision makers. And with the burst of the Internet stock bubble and the current mortgage crisis, "it's been a good decade for us," he joked with the audience.

Camerer also believes the concept of irrational decision makers may see wider circulation with President Barack Obama's appointment of Harvard Law professor Cass Sunstein to the White House Office of Information and Regulatory Affairs.

Nudge, a recent book co-authored by Sunstein, suggests governments and others should craft regulations that push people away from irrational choices toward better decisions such as healthy eating and saving money for retirement.

But back to bad Eddie Murphy movies. Camerer and his fellow researchers found a real life way to test the idea of strategic IQ with "cold opener" movies. Movies with a cold open hit the theaters without being pre-screened for critics. It's a technique usually reserved for a studio's box office bombs--better to send it out with no review than a bad review, Camerer found in his interviews of movie executives.

By comparing the data on Metacritic, a Web site that compiles reviews of movies, with box office receipts, it appears that a large number of people did hit the theaters for the infamous Pluto Nash.  Camerer said they weren't thinking strategically about what the other "player" --in this case, the movie studio--was doing. The moviegoers were not suspicious as they should have been about the cold opening. Instead, they took no news as good news, or at least neutral news, said Camerer.

The behavioral economic theory behind strategic IQ could help movie studios adjust their marketing, but there could be bigger jobs for the theory as well. In the countries of Eastern Europe, which are still transitioning to a market economy after the fall of the Soviet Union, the theory could for the first time guide the design of financial markets.

An engineered market might have have special trading rules, for instance, that push investors toward gathering more information--boosting their strategic IQ--before making a transaction., said Cramerer.